India has been the star of Asia's economic expansion. It has replaced China as the world's fastest-growing major economy. With a reformist, pro-business Prime Minister Narendra Modi at the helm, the world's largest democracy has been streamlining its notorious bureaucracy and making life easier for international investors.
That recent success has, however, stalled this year. Households aren't spending, companies aren't confident, and the government is scrambling to figure out how to restore a little faith in the country's future in both consumers and corporations.
Nowhere are its travails more evident than in the auto sector. The vehicle market is closely tied to the country's GDP progress. Investors should therefore be avoiding the U.S. listings of Indian automakers, although growth specialists would do well to watch for an economic rebound.
The main U.S. listings in the auto sector are New York-listed Tata Motors (TTM) , as well as ADR listings of Hero MotoCorp (HRTQY) , Maruti Sukuki India (MRZUY) , and Eicher Motors (ECQRY) . Mahindra & Mahindra, or M&M, is listed in London LSE:MHID.
India-only major listings in the sector would add Ashok Leyland NSE:ASOK, Bajaj Auto NSE:BAJA and TVS Motor NSE:TVSM.
The pick of the India listings at the moment would be truck maker Ashok Leyland and M&M.
The heavy-goods vehicle market is functioning at volumes that are below replacement levels, according to the brokerage Nomura. The slowdown in truck sales has been more savage than other forms of vehicles, with sales down 22.8% this year.
While the near-term outlook is tough, the brokerage says Ashok Leyland's sales are close to rock-bottom levels seen in the past. So the "risk-reward seems favorable," Nomura auto analysts Kapil Singh and Siddhartha Bera conclude.
Mahindra & Mahindra gets a large slice of its business from tractor sales and other farm vehicles. This is a sector that the government is desperate to spur, granting agricultural subsidies to farmers, meaning there are few regulatory restrictions on tractor sales. Heavy-goods vehicles as a category should eke out narrow growth in 2020 but post the best sales performance of all vehicle categories in 2021, up 18.4%.
For personal transport, two wheels trump four more often than not in urban India. The decline in two-wheeler sales is least pronounced, at 7.1% this year, among market segments.
However, bike costs appear set to rise by 10% as the government toughens emissions standards. Registration charges for scooters and motorbikes are also set to rise 2% in 2020. Prospects of a rebound in sales are therefore also least pronounced among vehicle segments, bikes the only product category not projected to hit a double-digit increase in sales in 2021 (up 9.8%).
These higher two-wheel costs would hurt Eicher Motors, which is the parent of the famous British motorbike brand Royal Enfield. It calls itself the "oldest motorcycle brand", at least that's been in continuous production, with the first one built in 1901. Royal Enfield made motorbikes for the British Army in World War I and II, and started making bikes in India based on that reputation in 1955.
Higher costs would also impact TVS Motor, a specialist motorbike, scooter and three-wheeler manufacturer. Sales have been flagging, likely to fall 8% to 10% this fiscal year, which runs through March 2020. Although the company's shares jumped 9.5% last week after it beat earnings, the stock is expensive at 26x earnings.
Carmaker Maruti Suzuki is due to report earnings on Thursday. Sales are projected to fall 16% this fiscal year, and the stock also looks expensive with profit-forecasts falling and at 41x earnings. Passenger-vehicle sales are down 15.1% this year, and likely to rebound by an equal 15.0% in 2021.
Total domestic sales of all forms of vehicles hit 25.6 million for the last fiscal year, up 5.0%. But they are forecast to fall 8.8% as India's economy shifts down a gear, to 23.3 million for the year through March 2020. After a flat 2020, they'll likely to rebound 10.8% in 2021.
The Indian economy is currently experiencing a "soft patch", according to Standard & Poor's, that got softer during the first half of the year. The result is a dramatic slowdown.
Growth of 7.4% last year led the world's major nations, once again outpacing China, by almost an entire percentage point. That was exceeding what S&P calls the country's expansion "potential" of around 7.0% per year.
But India's growth will likely crunch to just 5.6% for full-year 2019, according to Oxford Economics, a swift, sharp shock. Reduced private consumption is mainly to blame - bad news for big-ticket items like vehicles.
It should be a short-lived slowdown, growth rebounding to 6.8% in 2020 and back close to 7.0% thereafter. That's the fastest expansion in Asia by quite some stretch - China will be struggling to hit government-mandated targets of around 6.0%.
One positive data point on the economic front is that core inflation remains low. High inflation is the bane of the Indian economy, soaring to a record 12.2% in November 2013, but it has been brought under control by the fiscally responsible Modi administration. It sank as low as 1.5% in 2017, a record low, but thanks to high food prices (there's an onion shortage!) is now just under 4.0%.
The current state of inflation gives the central Reserve Bank of India scope to aid the economy with interest-rate cuts. It reduced rates by 25 basis points at its October meeting, its fifth straight such move, bringing the benchmark repo rate to 5.15%.
The government has also sought to cut taxes. It has slashed the corporate tax rate from 30% to 22%. Although it also eliminated some one-off tax breaks for companies, the lower structure should help boost corporate confidence.
It will take time for Indian companies and consumers to regain their optimism. That means autos are off the price list for Indian buyers - and their manufacturers should be for the time being for U.S. investors, too.
